Windfalls or Just Rewards: Class Action Fee Ratios in Ontario

Abstract

Class counsel fees and their relationship to class member compensation are among the most important – and most controversial – statistics used to evaluate the normative outcomes of the class action mechanism. The perception that class attorneys reap windfall rewards while the class ‘gets nothing’ is persistent among class action critics. The ratio of legal fees to settlement funds captures the critical trade-off between counsels’ entrepreneurial incentives to pursue lucrative claims and the agency challenges endemic to these proceedings. The authors’ analysis uses new data and novel econometric methods to explore the nature of class action fee ratios in Ontario for both economics and legal audiences. To start, we calculate “all-in” fee ratios -- lawyer fees plus disbursements divided by settlement amounts in Ontario -- of 25.0% on average and at the median. Next, we show that judges are sensitive to windfall gains and sweetheart deals, problems associated with large awards, and adjust fees based on settlement size. These data and estimates contribute to a better understanding of judicial economy and access to justice in practice, the principal arguments in favour of class proceedings.

Keywords: Fees, Class Actions, Settlement, Economics

JEL Classification: K41